Issue: 37
Sent: 08-05-2006 09:02:33
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SMSF Auditing Issues - Tony Negline
There are more than 300,000 self-managed super funds that are all different from each other, but the laws governing them are detailed and specific.
From a regulator's perspective, it is difficult to develop systems that can be used to check compliance uniformly across this sector. So the Australian Taxation Office, which regulates SMSFs, seeks to supervise them by identifying trends, factors or activities that might indicate bad behaviour and develop processes to counteract them. Although this system sounds less than perfect, it is successful.
The chances of bad behaviour slipping through the net are further reduced because each year a small fund has to be audited. The audit confirms the financial bona fides of a fund and checks to ensure all laws have been complied with.
Over the last year or so, there have been some important changes to how SMSFs are regulated and anyone involved in these funds needs to know about them. Here is a summary of the changes:
* The ATO last year let auditors know it was not happy about the quality of work being done by many of them, and warned of the consequences of continuing to do a poor job. This is especially important for SMSF trustees because legislative breaches found after poor audit work might lead to penalties. One concern for the ATO is its belief that the job of an SMSF auditor might be compromised if there is a close connection between the auditor, administrator and accountant.
The ATO believes it is unlikely to get a robust audit if the auditor and administrator are from the same small accounting practice. Last year, it demanded that auditors take their independence seriously.
The various accounting bodies were concerned about this because they believe they regulate this area of activity.
Institute of Chartered Accountants former CEO Stephen Harrison said: "Our professional standard has clear guidelines on how to identify, assess and manage risks to professional independence. Where safeguards cannot be implemented, the member is obliged to reject or cease the engagement.''
In a big win for the accounting bodies, the ATO has to agree with this view. However, the ATO has said the chances of it reviewing a fund will be higher if a SMSF's tax agent and auditor are from the same company.
* If a SMSF auditor finds a fund has breached a legislative requirement, then the auditor must tell the ATO of the breach if it might affect the members' account balances and other fund benefits. This reporting, which came into effect last July, in effect requires auditors to use their professional judgment to decide how important a particular legislative breach is before reporting it to the ATO.
However, until recently the ATO told SMSF auditors that it wanted to know about every breach no matter how trivial. The ATO admits it does not have the power to demand to know about every contravention and has told SMSF auditors to use their knowledge and experience before reporting.
So what happens when an SMSF auditor reports a breach to the ATO? The ATO writes to trustees acknowledging receipt of the notification and tells the trustees to rectify the contravention if they haven't done so already. The ATO then assesses the breach and if follow-up action is required the trustee is notified.
Ideally the ATO should do more at this point. The super legislation gives the ATO enormous power to fine or penalise anyone involved in a contravention of the super laws and trustees need to know if the ATO intends to let the matter drop or pursue the matter further.
The ATO has said it will not take any action on auditor reports it receives this financial year. This is good news because the current open-ended approach is not fair.
* One area that SMSF trustees need to be very careful about getting right is record keeping. Brett Davies, a Perth-based lawyer, says he is aware of some instances where trustees who have not kept adequate records have been threatened with penalties of various types. So what records are required? At a basic level, minutes of trustee meetings and decisions (where matters affecting the fund were discussed), records of all changes of trustees, members' written consent to be appointed as trustees, copies of all reports given to members, annual appointment of auditor, administrator, actuary and investment manager.
* The ATO has warned SMSF trustees to ensure that fund assets are held in the name of the trustee. The ATO says it has found various instances where fund assets are in a member's name or a member's business name. If a state or territory does not allow assets to be held in a super fund's name then an appropriate declaration of trust should be in place.
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